Child trust funds and Long-term care

Monday, 7th October 2013

This month we look at child trust funds and long-term care

Transferring Child Trust Funds to Junior ISAs

Since eligibility for new Child Trust Funds (CTFs) ended in January 2011, with the Junior ISA introduced as a successor account ten months later, the government has been considering whether the two types of account should be more closely aligned.

While Junior ISAs are only available to children who do not already have a CTF, the government acknowledges that, in the interest of fairness, children with CTFs should not be prohibited from holding a Junior ISA if this better suits their longterm interests – although they would not be able to hold both types of account at the same time.

Consequently, it has launched a consultation on whether it should be possible to transfer funds from CTFs into Junior ISAs and, if so, on what basis such transfers should be available.

The document proposes that transfers should be on a voluntary basis, and would work in the same way as the current arrangements for transferring CTFs or Junior ISAs between providers.

The funds in the CTF would need to be transferred in their entirety, following which, the CTF would be closed. With this option, registered contacts could keep the funds within a CTF rather than transferring them, if appropriate.

An alternative would be the merger of CTFs into Junior ISAs, leading to there being only one tax-advantaged savings product for children. However, as a result of the potential development costs and regulatory requirements associated with this option, not to mention the current vibrant nature of the CTF market, the government favours the voluntary transfer of accounts.

Any interested parties have until 6th August to comment on the proposals. The government will then consider how to proceed. As any changes will require new legislation, this will determine the timetable for implementation.

ISAs offer a very tax-efficient way to save for the future, as they attract no capital gains tax or income tax liabilities. Consequently, it is vital that all savers, both young and old, maximise their ISA allowances each tax year, otherwise these will be lost.

For 2013-14, junior savers can invest up to £3,720, while the limit for adults is £11,520 – of which £5,760 can be put into a cash ISA.

Regardless of whether the proposed changes come into effect, the team at French & Associates can advise on all types of investments, including CTFs and ISAs, to ensure you make the most of the opportunities available for both you and your child.

For more information and guidance, please contact us.


Every little helps on annuities?

Supermarket giant Tesco has been hitting the headlines with news that it is to offer a comparison service for annuities.

The retailer is set to expand its price comparison website, Tesco Compare, to help people shop around more easily for the best retirement incomes. The site currently offers comparison services for insurance, credit cards, loans, mortgages, utilities and holidays.

Each year, 400,000 retirees cash in pension contributions to buy an annuity, which then provides an income for the rest of their lives. But according to research by the Association of British Insurers, one in three does not feel informed enough to compare alternative quotes and many settle for the offer made by their pension provider, which could be less favourable financially.

The Tesco move drew a qualified welcome from Karen Barrett, chief executive at the website, which helps consumers to find regulated and qualified financial and other advisers.

She said: “The industry has long been aware that there is a real need for people to shop around for their annuity to ensure they are getting the best income in retirement and new entrants like Tesco prove just how big the market for this type of service is.

“While Tesco helps to spread awareness amongst consumers that they should shop around for the best annuity deal, their service is non-advised. We believe it is important for consumers to understand that they do not have to be an expert in annuities to make the right decision – taking professional advice on their pre and at retirement options is an easy and reassuring way to work through the different options, to ensure they are making the right choices for their retirement income.”

Few details are yet available about how the service will be run and the costs involved, so it is not clear whether enhanced or impaired life annuities will be included.

These products provide higher incomes for smokers and people with health problems – including those caused by lifestyle factors, such as obesity, high blood pressure and high cholesterol – due to their shorter life expectancy.

However, while at least 60 per cent of people qualify for an impaired life annuity, the uptake for these products is significantly less, especially when retirees do not seek professional advice.

In addition to providing guidance on the most appropriate type of annuity for your individual circumstances, independent experts can also advise on other options for retirement income, such as flexible and capped drawdown.

Under flexible drawdown, anyone with a guaranteed annual income of at least £20,000 from pensions and annuities can take as much – or as little – income as desired from their personal arrangement. Individuals can, if appropriate, take their entire pension fund as a cash lump sum, although three-quarters of this would be taxed as income.

Anyone who does not meet the £20,000 minimum is subject to the capped drawdown rules, enabling them to decide how much to withdraw each year up to the maximum set by GAD.

At  French & Associates Ltd., we can provide expert advice to help clients clarify their options with regards to making the most of their retirement income, so that they can make informed decisions about the best way forward.

 For more information and advice, please contact us.


Employers not ready for auto-enrolment

Nine in ten smaller businesses feel unprepared for when they start automatically enrolling their staff into a workplace pension, according to new research.

The government initiative began in October 2012 with the largest firms and a gradual roll-out will see employers brought on board by 2018.

Although The Pensions Regulator recommends that employers start preparing for auto-enrolment 12 to 18 months before their staging date – the date at which they start automatic enrolment of eligible employees into qualifying workplace pension schemes – new research suggests that many are nowhere near ready.

Software specialist IRIS revealed that, following a survey of more than 400 businesses to assess their knowledge and preparation for auto-enrolment, 59 per cent were unprepared.

But the figure jumped to 90 per cent in businesses with fewer than 100 employees and more than half of these businesses had no idea when their staging date was.

While 12 to 18 months may seem like a long time, there are a number of issues business owners need to take into account.

Firstly, with so many firms unprepared for auto-enrolment, there is set to be a significant bottleneck as the capacity of provider is overwhelmed by too many employers clamouring to set up schemes at the same time. This is especially true in terms of the limited number of employees at NEST, who are unlikely to have the resources available to meet demand.

Secondly, as every provider will want to ensure their schemes are profitable in the future, they will not accept employers until the potential scheme has been costed out. Furthermore, employers need to allow enough time to put systems in place to cope with the reporting demands of auto-enrolment.

Therefore employers need to set aside an absolute minimum of six months to meet their staging deadlines – especially given the significant fines that businesses can accrue for non-compliance.

The fixed penalty of £400 is accompanied by escalating penalties based on the number of employees, with businesses being chargedbetween £50 and £10,000 each day they continue not to comply with the regulations.

At French & Associates Ltd., we can provide expert advice on automatic enrolment issues, including assessing the eligibility of existing pension schemes and setting up new schemes, as well as providing ongoing advice and administration services to ensure continued compliance.

For more information, please contact us.


Discounted Gift Trusts exempt from GAAR regime

Individuals looking to minimise their inheritance tax (IHT) liabilities have been given a welcome boost following the publication of the guidance notes for the new General Anti-Abuse Rule (GAAR).

The guidance confirmed that Discounted Gift Trusts will not fall under the scope of GAAR.

Discounted Gift Trusts enable an individual to place a lump sum into an insurance bond written in trust while retaining an income from it in the form of fixed regular withdrawals of capital. As the retained rights are set when the bond is established, these are carved out for the donor and are considered separate from the gift.

The capital value carved out of the bond in order to purchase the lifetime withdrawals is immediately exempt from IHT. Furthermore, as long as the individual survives seven years, the remaining value of the gift does not form part of their estate when calculating the liabilities due.

As both elements are considered part of the trust, when the individual dies, the total remaining value of the bond will pass to their beneficiaries.

The donor can only benefit from the regular withdrawals and not the remainder of the lump sum, so the reservation of benefits provision does not apply to the trust assets, as has been approved in case law and accepted by long-established practice.

Therefore, correctly established Discounted Gift Trusts will be exempt from the new GAAR regime.

As the specialists at French & Associates have many years’ experience in all aspects of IHT and estate planning, they can ensure your arrangements are both tax efficient and completely in line with the GAAR guidance notes.

For more information on the use of Discounted Gift Trusts to minimise your IHT liabilities, please contact us.


Counting the cost of long-term care

Long-term care has been hitting the headlines again lately, with the government’s plans to cap costs confirmed in the Queen’s Speech in May.

Under the proposals, a £72,000 cap on costs will be introduced in 2016, with the government stepping in to pay costs above that level in a move designed to prevent people having to sell their homes to pay care bills.

A new means test threshold will be set at £118,000 in capital assets, almost five times the current limit of £23,250. However, this will still include the value of an individual’s home, unless their spouse or partner or certain other relatives live there.

Meanwhile, the fees cap will apply to care costs alone and individuals will still need to meet fees for “hotel” costs, such as food, accommodation and heating, along with general living expenses, which could add up to several hundred pounds a week.

The new measures are not scheduled to come into force until after the next election, which could mean they change in the future – and with the new rules unlikely to be retrospective, the costs of care now are unlikely to count towards a future cap.

More and more people are taking steps to protect assets against future demands. For example, pre-nuptial and post-nuptial agreements can ring-fence a future inheritance from parents, so that in the event of a divorce, those assets are excluded from a financial settlement.

Taking steps to plan financially for future care costs can make sense, such as putting in place certain types of trust and care fee insurance plans.

But expert advice is essential to avoid falling foul of tough rules on deprivation of assets – in other words, deliberately moving assets to avoid care costs, which can see local authority reclaiming those assets.

At French & Associates Ltd, we understand the need to protect homes and other assets that individuals have worked hard for. Consequently, we work with our clients to review issues such as the value of their house and savings, their current and future likely incomes, any benefits they may be entitled to if they go into care and their family circumstances.

Once we have analysed these areas in detail, we can help our clients make informed decisions about their future.

For more information and guidance, please contact us.


Pensions pots on the move

The government has announced plans to help millions of savers take workplace pensions with them when they change job.

The auto-enrolment initiative means that by 2018, all employers will need to offer a workplace pension to eligible employees, but more savers means there will also be more pension pots – and when people change jobs, these pots could be stranded or completely lost over time.

The Department for Work and Pensions has estimated that people have an average of 11 jobs over the course of their working lives. By 2050, that would result in around 50 million dormant pension pots.

Consequently, the department has announced a “pot follows member” system as part of the Pensions Bill, which will enable any pots of less than £10,000 accrued will automatically move with the member when they change jobs. These automatic transfers are projected to reduce the proportion of people reaching retirement with five or more dormant pots from a quarter to one in 30.

Minister for Pensions Steve Webb said: “Instead of having lots of small pension pots all over the place, we want people to have a ‘big fat pot’, which will buy them a better pension. When people change jobs, they often leave behind a pension pot which becomes forgotten and which can even attract higher charges once they leave the firm.

“We want to make it the norm that when you move job your pension rights can move with you if you wish. This will reduce the costs of providing pensions and will help people to be much more engaged with their pension savings.”

Initially transfers will only be for money purchase schemes. Those in defined benefit occupational pension schemes will not be included at this stage.

Pension scheme providers and administrators will deal with the transfer, but pension savers will be kept informed and have the right to opt out of the process.

French & Associates Ltd can provide comprehensive advice on maximising the efficiency of pension arrangements, including a free review of current pension arrangements. For more information, please contact us.


Consumers get extra peace of mind on cover

New legislation will give individuals taking out insurance added peace of mind that claims will not be turned down because they unknowingly failed to provide information to their insurer.

The new Consumer Insurance Act, which came into force on 6th April, formalises existing industry best practice to ensure that insurers ask all relevant questions to obtain the specific information they need at the point of sale. It will also:

Give consumers legal protection that claims will not be declined for non-disclosure of information, unless the information is deliberately or carelessly withheld or is misleading.

Apply to all personal insurance, such as home, car and travel insurance, life, critical illness and income protection insurance, health and pension annuities

Apply regardless of how insurance is purchased, whether online, over the phone or face-to-face The Association of British Insurers, said: “We want customers to take out insurance policies with the confidence that they are covered. By placing a legal duty on insurers to ask customers all relevant questions at point of sale, people will know exactly what they need to disclose upfront.

“This Act reflects steps taken by the industry over the years to improve customer awareness of what they need to tell their insurer. For example, the ABI Code of Practice for life, critical illness and income protection insurance helped reduce the number of claims declined for non-disclosure.”

French & Associates Ltd can advise on a wide range of insurance products, to identify those that best meet your needs and deliver the best value for money. For more information, please contact us.


Financial advice that marches to the beat of your drum 

Under the rules of the Retail Distribution Review (RDR) which came into force at the end of last year, firms providing financial advice need to be upfront about the amount charged and what the client is receiving for their money.

Gone are the days of commission from product providers. Instead the fees charged are based on the services provided to the client, rather than the product or provider being recommended.

Firms need to demonstrate that a particular product was chosen to suit their clients’ unique needs after a comprehensive and unbiased analysis of the market. If an adviser offers a limited range of products, this restriction will need to be clearly explained from the outset.

As a result, for many of the bigger players on the High Street, the days of face-to-face financial advice are also gone. Those that continue to offer such advice are likely to provide only a restricted range of products.

The solution lies in working with an Independent Financial Advisor (IFA), such as the team at French & Associates Ltd.

For over 20 years, we have delivered dedicated, independent financial advice to our many clients. We carry out an in-depth analysis of each client’s individual needs and circumstances to provide the most appropriate solutions for every stage of their financial lives, based on the whole market of products rather than a single provider.

Therefore, clients can be sure that we will always act in their best interests and that our advice will be informed, professional and impartial.

To find out how our experience and knowledge can make a real difference to your financial future, please contact us.